INTRODUCTION

The law on Panamanian corporations, adopted in 1927, is a
version of the corporation law of the State of Delaware, United
States, and since its enactment, has been widely used by the
international financial community due to the multiple advantages
and benefits that these corporations offer in the achievement of
offshore operations, among other purposes, as well as for the
freedom, flexibility and ease in their handling.

Panamanian corporations are chartered mainly to operate and
carry out commercial and industrial activities; acquire properties;
limit the personal liability in the performance of business
transactions that imply risks, or to structure the payment of taxes
in foreign jurisdictions on profits from commercial transactions.
Thus, Panamanian corporations buy yachts in Mediterranean and oil
tankers in Asia, own bank accounts in Switzerland and Miami, buy
merchandise in the Far East and set up trusts over properties
located in Egypt or London. With these examples we want to
emphasize the multiple uses given to Panamanian corporations and
their acceptance by banks, investors and governments in all parts
of the world despite the political situation in Panama at any given
moment, as was demonstrated during the 80's, when Panamanian
corporations were still being registered and, the already existing
never ceased to receive the tax benefits that Panamanian law
offers, nor were they at risk of ceasing to exist or operate by
government decree.

Such success was demonstrated by the fact that more than 350,000
corporations are currently registered and active, and their owners
and beneficiaries are, for their great part, non-resident, foreign
citizens, that do not conduct any commercial transactions in
Panama.

Our experience indicates that to properly use Panamanian
corporations and conduct transactions and operations with them the
users or owners thereof must know the practical aspects of their
incorporation and management, which are not easily understood from
simply reading our corporation law. Considering the foregoing, we
have prepared this explanatory booklet to give the reader a
practical and simple guide that, apart from any legal explanation,
provides basic information on the operation and use of Panamanian
corporations, stating that this booklet does not pretend to
substitute or refrain the reader from the guidance and advice of a
Panamanian attorney, whose assistance is always necessary and
recommended.

ADVANTAGES OF THE PANAMANIAN CORPORATIONS

A) Tax Benefits

The Panamanian taxation system is based on the territorial
source of income. As such, the income earned from commercial
transactions conducted outside of Panama is not subject to taxation
in this country. Neither is subject to taxation, income from:

Reinvoicing, from an office
established in Panama, the sale of goods or services for an amount
greater than that for which those goods or services have been
invoiced to the office in Panama, as long as such goods or services
remain abroad. This practice is known as "double
invoicing";

Managing, from an office established
in Panama, transactions that are executed, take place of have
effects abroad; and

Distributing earnings or dividends or
shares, when such dividends or earnings are produced from income
generated or earned by the company outside of Panama, including the
income from activities mentioned in 1) and 2) above.

Granting of loans or opening of lines
of credit, in the way of interests, commissions or income of
similar nature earned by individuals or corporations, regardless of
their domicile or country of incorporation, or the place of
disbursement of funds, provided that the debtors are domiciled
abroad and the use of such financing is not used in Panama.

It is also exempted from the payment
of taxes in Panama the income earned from the international
maritime commerce and trade by owners of vessels registered in
Panama, regardless of the place where the contract is
executed.

Interests paid by banks located in
Panama to any depositor for deposits located in Panama.

Panamanian corporations that operate
abroad can distribute all or part of their assets among their
shareholders without them or the corporation having to pay taxes in
Panama.

B) Absence of Government Controls

Other than for the carrying out of specific types of business
activities within Panama, such as banking, insurance or the
providing of public utility services, there is no government entity
or agency that has to authorize, approve or supervise the formation
of a corporation, the amendment of its articles of incorporation or
the beginning of its operations. Nor the issuing or transfer of
shares, or the modification of the authorized capital of the
corporation, the distribution of dividends, the dissolution,
winding up or sale of the assets of the corporation is subject to
government notice or approval.

There is no obligation of filing any kind of statements or
financial reports before the fiscal authorities of Panama by
corporations that do not carry out businesses within Panama.
Transactions conducted abroad or the income earned from the same
are not subject to report.

Also, it is not necessary to register or provide before any
government authority, private or confidential information of the
corporation, such as names of the shareholders, financial
statements, and names of trustees or resolutions adopted by the
Board of Directors or the Shareholders. Notwithstanding the
foregoing, it will only be necessary to provide specific
information to government authorities when required by them through
the courts of justice as a result of a criminal investigation or
legal process.

Once a corporation is chartered, it can conduct all the
activities, objectives and businesses that its shareholders or
directors wish, as long as they do not infringe any legal
provision.

C) Capitalization

The law does not require a minimum corporate capital for the
chartering of a corporation, or for its further operation or
carrying out of its objectives. Neither it is required that the
corporate capital be totally paid up when shares are registered in
a shareholder's name. Actually, the corporate capital is only
important for inscription purposes, since it serves as the basis
for the calculation and payment of the registration fees of the
articles of incorporation with the Public Registry. For all
practical effects the corporate capital determines the amount of
investment that the corporation can raise through the primary
issuing and sale of its shares. Based on the foregoing, the setting
out of the corporate capital becomes irrelevant for corporations
chartered for personal purposes such as acting as holding company
of personal wealth. Therefore, the amount of corporate capital set
out for this type of corporations is that which pays the lowest
inscription fee to the Public Registry.

i. Par or Non Par Value Shares

The capital of a corporation can be stated in any type of
currency, represented, in shares with par or non par value. In the
former case, the par value is set out in the articles of
incorporation. In the latter, the value or price of the shares it
determined by the Board of Directors at the moment of issuing. The
issuing of the shares can be paid by the shareholders either in
cash or by providing works, services or goods of any king to the
company.

ii. Bearer Shares

The law allows that the shares be issued in bearer form, in
which case the subscriber or shareholder will have to pay the
company for the full value thereof.

Bearer shares are transferred through their delivery by the
shareholder to the person who acquires them for any consideration,
without requiring any endorsement or any report of such transfer to
the company.

As we can see, bearer shares are a guarantee to the shareholder
who wishes to remain anonymous. Additionally, bearer shares
simplify the transfer of ownership in the company, absent of any
bureaucratic procedures. The risk of this type of shares is that
the holder thereof will be considered as its owner. Therefore, in
case of loss of a bearer share the true owner can not claim title
thereof.

D) Inapplicability of the Alter Ego or Responsibility
Principle

The shareholder is not liable for the obligations of the
corporation. He only responds to the creditors of the company for
the amounts owed to the corporation for the issuing of the shares
in case they have not been fully paid. Also, the corporation is not
responsible for the personal liabilities of the shareholder.

E) Personal Corporations

The corporation can belong to only one person. There is no
prohibition against the company having one shareholder. One
individual or corporation can be the owner of all shares, or have
the majority control of the corporation.

Additionally, a corporation can be shareholder of another
corporation.

F) Shareholders' and Board of Directors' meetings

The meetings of the shareholders or directors can take place
anywhere in the world. It is not necessary that the meetings be
held in Panama. The law also allows that the resolutions of
shareholders and directors be adopted by consent, through
electronic means, either by telephone or fax, provided that all the
shareholders and directors have participated in the meeting or were
in contact among themselves and express by majority their consent
or approval of the corresponding resolution.

The shareholders can be represented by proxy in a shareholders
meeting. The articles of incorporation can provide that the members
of the board of directors be represented by proxy as well.

In order for a shareholders or a board of directors meeting to
be valid it is necessary that it has been previously served
according to the procedure and prior to the compliance of the
requirements set out in the articles of incorporation, unless the
shareholders or directors waive their right to previous notice.

G) Management of the businesses of the company

Despite the fact that by law the supreme power and authority is
vested in the general shareholders' meeting, the management of
the businesses and the carrying out of the objectives of the
company correspond to the Board of Directors, which must be
composed of at least three members, either individuals or
corporations, who do not need to be Panamanians, nor domiciled in
Panama.

By law, the Board of Directors have the following powers and
authority, in addition to any other that may be set out in the
articles of incorporation:

Appoint and replace the officers of
the company, to wit, at least a President, a Secretary and a
Treasurer.

File law suits and defend the company
from legal proceedings.

Adopt and use a corporate seal. This
is not required by law.

Acquire, purchase, own and use all
kind of goods and assets; mortgage assets of the company to secure
debts or obligations of the company. It is important to point out
that, by law, to sell, exchange or in any other was transfer assets
of the company or giving them in mortgage to secure debts or
obligations of any third party it is mandatory to have the previous
approval of the shareholders, given at a shareholders meeting,
unless the articles of incorporation specifically grant those
authorities to the board of directors.

Enter into of and execute contracts
of any kind which do not imply the disposal, transfer or compromise
of assets of the company.

Adopt by-laws.

Contract or enter into loan
agreements, the opening of bank accounts.

The law does not set out a minimum number of meetings that the
board of directors must hold within a year. Therefore, unless the
articles of incorporation does not provide for such minimum, the
directors will meet the times and at the places that the board so
approves.

It is convenient to mention that in order to simplify the
execution of the businesses and objectives of the company it is
possible that the shareholders grant a general power of attorney to
an individual to undertake the duties of the Board or the
shareholders, and carry out the businesses of the company, so there
will be no need for resolutions approved by the shareholders or the
board of directors.

As to the liability of the members of the board of directors,
our legislation exempts them form legal responsibility or any
liability for the obligations of the company during its normal
course of business, provided they were not taken or approved in
violation or breach of the law or the articles of incorporation of
the company. The directors are jointly liable to their corporation,
to the shareholders and to third parties for the inadequate and
deceptive management of corporate assets, or for the fraudulent
issued of shares for a value inferior to the face value of those
shares, or for distributing unjustified dividends.

H) Shareholders

The shareholders, gathered in a shareholders' meeting, are
the supreme authority of the corporation. They don't need to be
Panamanians or be domiciled in Panama.

The law does not set out a minimum number of meetings that the
shareholders must hold within a year. Not even requires that the
shareholders meet at least once a year. Therefore, unless the
articles of incorporation does not provide for such minimum, the
shareholders will meet the times and at the places that the board
so approves, or at the request of shareholders who represent at
least twenty percent of the authorized capital of the corporation.
It is customary, however, to set out in the articles of
incorporation that the shareholders will meet at least once a year,
to receive from the board of directors a report on the management
of the company; to appoint directors and to approve the payment of
dividends.

For all legal purposes, a shareholder of a Panamanian
corporation is the person who appears registered in the record book
of shares of the company, if the shares are registered, that is,
when the shares are issued in the name of an individual. If the
shares are issued in bearer form, the holder of the stock
certificate will be considered as the shareholder of the company
for all legal purposes. In fact, when a bearer share is issued, the
Record Book of Shares does not indicate the name of the
shareholder. In this case, to prove the ownership to a share and be
able to participate in a shareholders' meeting, the shareholder
will have to show the stock certificate.

As indicated before, bearer shares are transferred by the simple
delivery of the stock certificate to the new owner, without further
notice or report to the company, whereas in case of nominative or
registered shares, the transfer of the shares must be reported to
the company in order for the latter to take note of such transfer
in the Record Book of Shares, otherwise for all legal purposes the
company the shareholder will remain to be who appears on
record.

Every shareholder has a right to complain against and challenge
the decisions or the resolutions approved at a Shareholders'
meeting when they are adopted in violation of the law or the
articles of incorporation, as well as to demand from the Board of
Directors the rendering of accounts of their duties and the
handling of the corporate affairs.

Unfortunately, our legislation does not grant the minority
shareholders any particular or specific protection against
decisions adopted and approved by majority shareholders when they
are consistent with the law and the articles of incorporation.
Therefore, minority shareholders are subject to the majority
decision.

The transfer and sale of shares is no subject to regulation or
approval by, or registration with, any government entity or
authority. However, special of preferred rights, as well as
limitations and restrictions, can be established in the articles of
incorporation as a condition for the transfer of shares by a
shareholder.

The shareholders, by law, are who have the power to decide at a
general meeting, the amendment of the articles of incorporation;
the appointment and replacement of directors; the winding up and
dissolution or merger of the corporation; the sale, transfer or
exchange or mortgage of corporate assets or grant them as
collateral to secure obligations of third parties (even of related
companies or subsidiaries), among other powers and authorities that
may be set out in the articles of incorporation.

As well as the directors, the shareholders can waive the right
of previous notice to shareholders' meeting and vote by means
of a proxy. Also, shareholders' meetings can be held anywhere
in the world.

I) Free movement of funds and absent of bilateral agreements to
provide information to other government authorities regarding
taxation.

There are no currency restrictions in Panama, or limitations
with respect to the transfer, assignment of moneys goods or assets
abroad. Panamanian corporations can undertake and enter into any
kind of financial transactions without being subject to government
approvals or authorizations. Such operations do not need to be
reported. However, in case the corporation had deposits with banks
located in Panama any movement of funds for amount up to
US$10,000.00 has to be reported as a means to avoid and control
money laundering.

Panama has not entered into, nor sign with any foreign
government double taxation treaty or treaties related to the
exchange of financial information. Therefore, any investigation by
a foreign government dealing with tax matters would not prevail in
Panama.

J) Panamanian Public Registry

Panamanian corporations shall be registered in the Public
Registry for its incorporation, as well as any amendment to
articles of incorporation. Likewise, the appointment and
replacement of directors, officers and a Resident Agent must be
recorded with the Public Registry. This is what gives security and
certainty about the legal existence of the corporation and the
persons in charge of its management and legal representation. This
is not a mechanism of governmental control or regulation over the
corporation. The inscription is a form of notice to third
parties.

According to the general law on commercial contracts, it is an
option, but not an obligation, to register general powers of
attorney with the Public Registry.

FORMATION OF THE CORPORATION

Panama's law on corporation is very liberal and flexible. It
does not have complex requirements or formalities for the
organization of corporations. The formation procedure for a
corporation is very swift and simply. Two individuals, of any
nationality and not having to be domiciled in Panama, can subscribe
in any language the articles of incorporation, which should be
acknowledged by public deed before a Notary Public in Panama. These
persons need the essential assistance of an attorney, by legal
requirement. Such articles of incorporation shall be registered in
the Public Registry for effects of public notice to third parties,
without that meaning that this government agency acts as supervisor
of corporations. From that moment on, the corporation comes into
life and acquires a legal existence; different from that of its
shareholders.

The articles of incorporation shall contain the following basic
information:

A) Name and domicile of the subscribers of the articles
of incorporation. These persons can be either individuals
or corporations and do not need to be Panamanians, nor domiciled in
this country. The subscribers do not become shareholders for the
fact of just executing the articles of incorporation. Shareholders
will be those who subscribe the shares of the company and in whose
favor the shares are issued. For practical reasons of convenience
and with the purpose of maintaining the confidentiality of the
person of the investor, attorneys member of the Resident Agent for
the company act as subscribers of the articles of
incorporation.

B) Name of the corporation. This can be
expressed in any language, and shall be different from that of any
exiting corporation. The name of the corporation shall clearly
indicate, by a word, phrase or abbreviation, that it is a
corporation, i.e. Corp., Inc., or S.A.

C) Purpose or objective of the corporation. Our
legislation does not require the listing of a long inventory of
activities that the corporation will perform or carry out. It is
enough with expressing that the corporation shall be able to
conduct any lawful activity not prohibited by law. However, it is a
practice to set out a long list of generic corporate purposes and
objectives with the aim of complying with the legal requirements of
other countries where the corporation is going to operate, which do
require stating its corporate purposes in the articles of
incorporation.

D) Corporate Capital. The articles of
incorporation shall indicate the amount of the corporate capital in
currency from any country, which can be represented in par values
shares, in which case the articles of incorporation will have to
indicate such value; in non par value shares, or a combination of
both.

As we expressed in previous paragraphs, it is not required that
the corporate capital be paid up prior to the incorporation of the
company or thereafter for a corporation to operate, as required in
other jurisdictions. Corporations are organized generally with an
authorized capital of U.S. $10,000.00 because it is the maximum
capital which pays less registration fees to the Public
Registry.

Shares with or without voting rights or shares with preferred
rights, privileges, voting faculties, or restrictions, can be
issued, as long a those rights or limitations are established in
the articles of incorporation, which shall be stated in the
respective stock certificate.

The corporation law allows the corporation to acquire its own
shares. In addition, it authorizes modifying the corporate capital,
altering the nominal value of the shares or changing shares of one
class for another.

F) Domicile. The legal domicile of the
corporation is Panama. However, the articles of incorporation can
indicate that the corporation can have offices and even establish
its commercial domicile abroad, where the board of directors so
determines.

G) Duration of the corporation. It can be
incorporated for a defined or an undefined period, or for the
achievement of a determined operation. In any case, it can be
dissolved at any moment. In practice, it is set out in the articles
of incorporation that the company is incorporated for indefinite
period of time.

H) Name and address of the directors. By law,
the members of the board must be, at least three, either
individuals or corporations. While they are designated by the
client when requests the incorporation of the corporation, for
confidentiality or practical reasons, the attorney can offer the
service of providing nominee directors, who will act conforming to
the strict instructions of the client. The directors do not need to
be Panamanians, nor domiciled in this country. The articles of
incorporation can allow the directors be represented by proxy and
also that deputy directors be appointed.

The directors, as individuals and acting individually, can not
bind the company or undertake obligations on its behalf for the
single fact of being a director. The Directors act as a corporate
body and therefore their decisions must be approved by majority to
bind the company. Individual directors can bind the company if they
have been empowered or authorized by the board of directors or by
the shareholders, depending on who has the power and authority to
approve a transaction due to the nature of the business.

I) Name of the officers. By law, Panamanian
corporations must have at least three officers, to wit, a
President, a Secretary and a Treasurer. They are appointed by the
directors, usually among themselves. However, the law allows that
the officers be different from the directors. One person can hold
more than one office. As occurs with the directors, the attorney
also can provide them.

Our legislation does not grant powers or authorities to the
officers. Therefore, it is convenient to set out them in the
articles of incorporation. Consequently, absent of any powers,
these offices become symbolic because an officer can not represent,
nor undertake obligations on behalf of the company if he does not
have the corresponding authority.

The law on civil procedures indicates that the President is the
Legal Representative of the company. This does not mean that he has
power and authority to enter into agreements or bind the company
without approval or authorization. By being the Legal
Representative, the President has the authority to take notices and
to grant powers of attorney. Additionally, the President chairs the
shareholders' and directors' meetings; signs the minutes
together with the Secretary.

The Secretary takes the minutes and signs them together with the
President. Additionally, he keeps the records of the minutes and
delivers secretarial certifications regarding the resolutions
adopted by the shareholders or the directors at their respective
meetings; updates the registry of shares and gives notice of the
meetings.

J) Resident Agent. The law requires that a
corporation name an attorney or a law firm as Resident. His only
duty is to act as agent to collect from the company and pay to the
government annual tax that all corporations must have to be in good
standing. The Resident Agent has no power or authority to bind the
corporation or to enter into any kind of agreements. Nor does he
acts as service agent. The Resident Agent is a de facto liaison
between the company and third parties for communication
purposes.

ACQUISITION

To acquire a corporation it is not necessary to come over to
Panama. It is enough to provide by mail, telex or fax the
information mentioned above and indicate the name and address of
the person to whom the respective correspondence has to be
addressed to. Incorporation of a corporation takes about one
week.

For reasons of convenience, it is feasible to acquire
off-the-shelf corporations; which have been previously incorporated
to have in stock, but that have never operated. These corporations
do not have shareholders at the moment.

OPERATION OF A CORPORATION

Once the corporation is incorporated, it can engage in any
lawful activity, through its Board of Directors, which is in charge
of the management of corporate affairs and the execution of the
mandate of the shareholders. The corporate directors meet as many
times as they find convenient, unless the articles of incorporation
indicates otherwise, with the purpose of adopting the resolutions
or decisions necessary for handling the affairs of the
corporation.

Actually, it is frequent for attorneys to offer, at a yearly
cost, the service of corporation management for clients who wish to
preserve the privacy of their acts. In these cases, the law firms
provide the services of "nominee" directors who serve as
"nominal" members of the Board, which would meet and
adopt resolutions under written instructions of the client.

RECORDS THAT EVERY CORPORATION SHOULD HAVE

According to the requirements of the Code of Commerce, every
corporation should have a Record of Minutes where all the minutes
and resolutions adopted by the shareholders and the board of
directors must be kept. Additionally, the corporation must have a
Record Book of Shares where title or ownership of shares and the
transfer thereof must be recorded.

Also, accounting records must be kept. There are no formalities
as to the information that they must have. The requirement by law
is that the company must comply with the regulations of the
jurisdiction where it operates.

The foregoing are, in our opinion, the basic and most relevant
aspects to be known by the owner or user of a Panamanian
corporation. We reiterate that this information does not go into
the particular details or requirements of legislations regulating
or dealing with specific business activities carried out within the
Republic of Panama. Therefore, legal advised must be required in
each individual case or circumstance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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Cookies

A cookie is a small text file written to a user’s hard drive that contains an
identifying user number. The cookies do not contain any personal information
about users. We use the cookie so users do not have to log in every time they
use the service and the cookie will automatically expire if you do not visit the
Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to
personalise a user's experience of the site (for example to show information
specific to a user's region). As the Mondaq sites are fully personalised and
cookies are essential to its core technology the site will function
unpredictably with browsers that do not support cookies - or where cookies are
disabled (in these circumstances we advise you to attempt to locate the
information you require elsewhere on the web). However if you are concerned
about the presence of a Mondaq cookie on your machine you can also choose to
expire the cookie immediately (remove it) by selecting the 'Log Off' menu option
as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example,
advertisers). However, we have no access to or control over these cookies and we
are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement,
and gather broad demographic information for aggregate use. IP addresses are not
linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or
its affiliate sites) are not responsible for the privacy practices of such other
sites. We encourage our users to be aware when they leave our site and to read
the privacy statements of these third party sites. This privacy statement
applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or
contests. Participation in these surveys or contests is completely voluntary and
the user therefore has a choice whether or not to disclose any information
requested. Information requested may include contact information (such as name
and delivery address), and demographic information (such as postcode, age
level). Contact information will be used to notify the winners and award prizes.
Survey information will be used for purposes of monitoring or improving the
functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our
site, we ask them for the friend’s name and email address. Mondaq stores this
information and may contact the friend to invite them to register with Mondaq,
but they will not be contacted more than once. The friend may contact Mondaq to
request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’
information. When users submit sensitive information via the website, your
information is protected using firewalls and other security technology. If you
have any questions about the security at our website, you can send an email to
webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode),
or if a user no longer desires our service, we will endeavour to provide a way
to correct, update or remove that user’s personal data provided to us. This can
usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will
post those changes on our site so our users are always aware of what information
we collect, how we use it, and under what circumstances, if any, we disclose it.
If at any point we decide to use personally identifiable information in a manner
different from that stated at the time it was collected, we will notify users by
way of an email. Users will have a choice as to whether or not we use their
information in this different manner. We will use information in accordance with
the privacy policy under which the information was collected.

How to contact Mondaq

If for some reason you believe Mondaq Ltd. has not adhered to these
principles, please notify us by e-mail at problems@mondaq.com and we will use
commercially reasonable efforts to determine and correct the problem promptly.